FTC Votes to Block Merger of Arco, BP

The Federal Trade Commission voted narrowly Wednesday to seek a court order blocking the $27-billion purchase of Atlantic Richfield Co. by BP Amoco, making the proposed merger the largest the commission has ever tried to fight in the courts.

The FTC, voting 3 to 2 to challenge the deal, said the merger would leave California and other Western states vulnerable to price gouging at the gasoline pump. The risk, according to the FTC, was that the combined company would control too much of the production and sale of crude oil to the West Coast market, which is heavily reliant on crude oil produced on the Alaskan North Slope.

In the five years that Robert Pitofsky has served as FTC chairman, the agency has achieved a nearly unbroken winning streak when it has challenged corporate mergers in court, although it has been less successful in blocking mergers between nonprofit hospitals.

But executives of BP Amoco in London and Los Angeles-based Arco said they took heart from the fact that two of the five commissioners had voted against litigation.

“I’m very disappointed and surprised somewhat, because I clearly thought and still believe that this should have been settled through negotiations,” said Mike R. Bowlin, Arco’s chairman and chief executive. The two companies have spent nearly a year seeking approval for their merger and had offered to divest certain properties that would lessen the degree of concentration in the areas troubling the FTC.

“We are well into the process of preparing for litigation,” Bowlin said. “I fully expect that we will win.”

BP Amoco and Arco are the No. 1 and No. 2 companies in many aspects of the Alaska North Slope oil business, said Richard Parker of the FTC’s Bureau of Competition. Between them, they own the most acreage, have discovered the most wells, win the most bids from the Alaskan state government and have a dominant interest in the supertankers that transport the oil from Alaska to the West Coast.

“We have the No. 1 and the No. 2 firms combining, and that’s the combination that we’re going after,” Parker said.

He contended that BP has already attempted to “prop up” crude oil prices on the West Coast by taking Alaskan oil out of the regional market and selling it abroad.

“That is market power,” Parker said, adding that the only company with enough market share to lessen the effects of such price manipulations is an independent Arco.

A second FTC argument is that if BP Amoco were to acquire Arco, it would control 43% of the oil storage space and 50% of the pipeline capacity in the small town of Cushing, Okla. Cushing is a hub for a type of oil that is widely traded on commodities futures markets, and Parker said the FTC believes excessive concentration there “would provide all kinds of opportunity for mischief.”

Parker said the FTC also plans to argue in court that the merger would leave the Interior Department with essentially just one bidder for valuable mineral rights on public lands in Alaska.

Both oil companies have argued throughout the proceedings that FTC’s allegations of the risks to the West Coast gasoline consumer are vastly overblown. They say that in today’s world oil markets, California refiners could easily thwart any potential price manipulations by buying crude oil from another source.

BP Amoco spokesman Tom Koch said that although it is true that his company had diverted some oil out of the West Coast market after 1995, when Congress passed legislation permitting the export of Alaskan oil, it had done so only to prevent a glut.

“The only thing we export, typically, is crude oil that is excess to West Coast needs,” he said.

But in a news conference announcing the vote Wednesday, Parker said his agency believes California refiners are already at the mercy of BP’s power in the region.

“There is a group of West Coast refiners that . . . are utterly dependent on Alaskan North Slope crude,” Parker said. “BP knows who they are. It can and it does raise prices to them at super-competitive levels.”

Parker’s assertion echoed concerns raised by state Atty. Gen. Bill Lockyer that the merger would intensify upward pressure on California gas prices, which are already higher than the national average because of higher taxes and the expensive, cleaner-burning gas required by the state’s Air Resources Board.

Sens. Barbara Boxer (D-Calif.) and Ron Wyden (D-Ore.) have complained to the FTC that a deal between BP Amoco and Arco would increase gasoline prices.

“I think today’s decision is encouraging for West Coast gasoline consumers,” Wyden said, adding that Oregon’s gas prices are even higher than those in California. “It’s not going to be a snap-your-fingers cure-all, but it is a signal that the federal government isn’t going to look the other way any longer.”

Parker said his agency will file its request for a preliminary injunction in U.S. District Court in San Francisco because many witnesses are there and because so much of the dispute centers on West Coast markets. He said he expects the states of Oregon and Washington to file separate complaints.

In a process that could conceivably take months, even years, the case would first be decided by an administrative law judge. Parker predicted that the losing party would appeal the case back to the FTC. The commission would then rule on the appeal, and the losing party at that stage could take the case to the federal appellate courts. Oil industry analysts and antitrust experts said they doubt the FTC has a strong case on West Coast oil price manipulations.

“California is an isolated market, but it isn’t a separate market from the rest of the world,” said Roger Diwan, managing director of markets and countries for the Petroleum Finance Co., a Washington consultancy. “It’s clear that the California crude market has become much more competitive in the last few years.”

J. Fred Weston, a UCLA emeritus professor of finance who teaches mergers and acquisitions, said he believes the FTC vote was based on politics more than economics.

“It was politically popular to stop this [acquisition] because people are irritated with high oil prices,” he said. “They fail to recognize that the market for oil is a world market.”

Analysts said the FTC had a stronger case in its argument that storage tanks and pipelines in the Cushing hub would be concentrated in too few hands if the merger were completed. Diwan said that, for example, prices on the oil that Cushing’s facilities control fell last fall to levels that had no connection with free-market forces.

In that case, he said, the prices fell below normal market levels, suggesting that if BP Amoco or anyone else were trying to manipulate the markets, they were not gouging consumers but trying to beat other producers.

Stock market investors are becoming increasingly skeptical that the deal will be completed. Arco’s stock fell $2.19 to close at $72.06 on the New York Stock Exchange. BP Amoco’s American depositary receipts slipped 56 cents to $53.94.

Times staff writer Nancy Rivera Brooks contributed to this report.